The philosophy and practical problems of privatisation
A human being’s positive response to incentive is the underlying philosophy behind privatisation. During the last decade or so, the fundamental plank of socialism, nationalisation, came to represent inefficiency, corruption, nepotism, favouritism and in the ultimate analysis, failure. Without motivation for reward registered against achievement, the graph of performance fell appreciably. While some individual persons took their job with responsibility without any aspiration for reward other than their regular salaries and appreciation, most took their place of employment to be a place to spend their allotted time for work with the least amount of effort from their side, physical and/or mental.
The net result of rampant nationalisation was incomplete production and shoddy quality, a lack-lustre performance that was further compounded by surplus manpower and inefficient, corrupt management. For decades the communist model was eulogised in glowing terms as the perfect example of an ideology suiting the genius of the people. With the advent of Gorbachev, a new urgency came into the USSR’s economic life, Perestroika (economic reform) was introduced along with Glasnost (openness). Unfortunately for the Soviet Union, they reversed the Chinese model, Glasnost raised the aspirations of the people, Perestroika followed far behind, frustrating the raised hopes of the masses. The result is that the Soviet empire has crumbled, COMECON has failed as an economic unit and the military arm, Warsaw Pact, is a thing of the past. The whole region is now in turmoil, political problems have surfaced mainly due to economic inequity.
While we should remain apprehensive of the possible conflagration in Eastern Europe spreading into anarchy in the fertile ground of the Soviet Union, passing presently through a severe identity and ideological crisis, the many Third World countries that had blindly followed the socialist model are in economic shambles. The socialist model was unfortunately flawed in that crucial ingredient necessary for commercial success, the lack of human incentive. The quality of life in the so-called world of equality came down to near poverty level for everyone but a privileged elite in the communist and socialist world whose life-style was uplifted in a corrupt, sheltered life matching that of the rich elite of the capitalist world. A great frustration arose among the masses, the bankruptcy of socialistic ideals came to be exposed in practice. Some of the more progressive, intellectually honest leaders pin-pointed the root cause as lack of incentive and the iron curtain of deceit started to crumble. Many newly independent Third World nations had followed the socialist route without going communist, in effect where communism could be equated to a deep shade of red, most of them became communist in all but name because of the deep religious beliefs of their masses, ranging from a light shade of pink to pink itself, a fashionable colour of the time for leaders to choose as an ideology to follow.
The first chink in the socialist monolith had actually come from the most dedicated of converts to communism. An outstanding Chinese leader, Deng Tsao Peng, decided that it was time for reform of the economic system if China’s burgeoning population was to achieve economic emancipation, he opted for gradual induction of the private sector, phase-wise over different regions. Already at odds with China over ideological interpretations, Chinese were much further left than the USSR and the COMECON countries, the shift of China to their right was thus quite perplexing for the communist ideologies. Guided by a master political craftsman, the Chinese went according to a measured pace while loosening economic controls, keeping economic freedom ranging far ahead of political aspirations. Over the years, as the Chinese model became a relative success, the Soviet Union took notice. With the backlash of Afghanistan setting in, a new generation of Soviet leaders with limited attachment to the past came to the conclusion that the socialist system was bankrupt in all senses of the word and that economic emancipation was possible only through a sweeping reform of the economy changing the theme from dominance of the public sector to relative liberty of free enterprise. For privatisation it was necessary to go for the three Ds, Deregulation, Denationalisation and Disinvestment. In contrast to the glowing face of communism as a panacea for social and economic ills, Gorbachev’s initiative in openness was a calculated gamble that the ugly face of public sector would spur the populace to the alternate in economic emancipation.
While remaining apprehensive of the spreading anarchy in Eastern Europe passing into a conflagration situation in the Soviet Union, one must candidly appreciate that in the circumstances there has been no other choice but to speed the process up. Even the gradual change in China nearly came to grief in Tiananmen Square in June 1989 as the speeding up of the process in Eastern Europe had a complementary effect in China. Unfortunately for the former COMECON countries, they have been further divided by nationality, passing through a combined identity and ideological crisis, putting the primary reason for change, economic solution in the backseat. The situation stabilises for a short time in one region and flares up in another, at the moment chaos is never far away.
For Third World countries mainly independent in the 50s, 60s and even the 70s, socialism was the fashionable route to follow. Emerging from years of imperial tutelage, the aspirations of the people demanded a system that promised social equality, justice and economic emancipation. History is an unfortunate witness to the economic and social catastrophe that ensued. Charismatic leaders turned to populist solutions, their sins of omission and commission are now being visited on their people. Without the basic infrastructure of utilisation and services, a large percentage of the masses in many countries may well be living in the Stone Age. Today in the bankruptcy of the socialist solution, the hardest hit are the poor, undeveloped countries. While the national cost has been high, what is particularly disturbing is that after years of lack of incentive, the human response to privatisation has become somewhat of a psychological paradox, whether to enter into the competitive world of reward and failure or to be safe rather than sorry.
In essence, the practical problems of privatisation cannot be resolved unless the whole system is deregulated. At this time there is universal skepticism that the bureaucracy would not let privatisation succeed at the cost of their unchallenged control. So the first major battle has to be one of psychological warfare, a propaganda campaign that convinces the masses that privatisation is not a short-term freedom but has come to stay. To do that, there must be tangible moves in emasculating the powers of bureaucracy over industry and commerce, these moves must seem to be effective.
The fundamental premise of a civilized society is that its members must have a legal means to livelihood. The interaction between human beings exchanging goods and services constitutes the economy. Gainfully busy in the process, human beings are called employed. Those paid from government revenues are called the public sector, those earning their livelihood without direct participation by government, its agencies or the public sector are called the private sector. The private sector may interface with the public sector and vice versa. In the public sector employment is guaranteed by the State at a fixed value, in the private sector there is a calculated risk in working for a greater return. In theory, government functionaries exist to smoothen the flow of commerce, in actual practice they tend to smother free enterprise. Before nationalisation introduced the public sector into enterprise, government regulations were a considerable obstacle to the freedom of commercial enterprise. Once they were officially inducted into commercial enterprise, they quickly discovered that they had an inherent advantage over the private sector in the system, viz (1) they could change the rules and regulations to suit their needs (2) if the enterprise failed, it carried no financial penalty for them, their livelihood continued in some other capacity and (3) therefore, they were not averse to the comforts and trappings of office which would be normally eschewed by private sector businessmen as unnecessary overheads. The government employees realised that their induction in the private sector gave them a quasi-legal method of interfering at will in the private enterprise, the private sector became further handicapped in traversing the maze of bureaucratic red tape. Despite the efforts of political governments since 1985, not much success has been registered in the privatisation of the invested units.
One of the major problems facing privatisation is that almost all the units have built up considerable liabilities, exceeding the assets by far. This is acting as a considerable disincentive to potential investors as are the large recurring overheads which the private sector avoids and which will become an albatross around the neck of any aspirant for equity participation. While a formula can be worked out whereby the nationalised banks have to write off some of the credit to these units to bring it in line with available assets, overheads in the form of excess personnel is a greater headache to overcome. It is not the fault of the employees that the public sector management employed two, three or even four persons where one was required, thereby causing grievous overstaffing. This overloading of overheads increased dissent and inefficiency as staff found the time and opportunity to instil an atmosphere of anarchy in once-profitable and humming ventures.
Overstaffing and impending disinvestment/denationalisation has created a Catch-22 situation, very few private sector entrepreneurs would like to take on the large staff with the units or to persevere with them once privatised. While “golden handshakes” are being touted as a panacea, this is hardly the solution as the main aim of privatisation is to increase efficiency and with increased profitability, further investment, resulting in more employment. Shed off the security of continued employment, the sum of the “golden handshake” soon shrivels up. As has been done in the case of Allied Bank Limited (ABL), the government must first try and hand over the units to a Management-Labour Consortium, encouraging them to look for private entrepreneurs to come into the equity participation. These WHITE KNIGHTS would thus be inculcated into a natural marriage rather than in an adversial relationship with the workers if they should outright purchase the units. The privatisation of MCB may not look good in comparison to the disinvestment of ABL on the surface, in actual fact the present management of MCB has managed a lasting truce with the workers union with the power of money available to any financial institution. This may not be so feasible in non-financial institutions which form the vast majority of nationalised units, where the owners lack funds to buy off the workers for any length of time. What makes the proposal to hand over the units to the workers very attractive is the fact that the Management-Labour Consortium would look at their overstaffing in a business-like profit-loss scenario and shed off those of their numbers who they find indolent, unproductive, inefficient, corrupt, etc. This a more natural method of removing surplus staff than to leave it to the arbitrariness of private investors who will hardly trust anyone among the employees with longer service except those they find clearly subservient to their dictates.
Above all, where is the money to buy up all these units? If this has to come as credits from financial institution as bridge-financing for investors then it may be a calculated risk in the throwing of good money after bad. One would rather that the liquidity of the private investors be used for opening up new industries and create new employment opportunities. The government must give deep thought to the problems associated with the lack of capital base in Pakistan to finance privatisation.
In the end, we must completely do away with the bureaucratic red tape. The only thing we have to do is to create zones for setting up industries as close to urban areas as environmentally possible and ensure that these zones have electricity, water, telecommunication, roads, gas, sewerage, etc under one window with the purchase of an industrial plot. The maximum incentives should be given to private sector power generation, without electricity there is no locomotive for the economy. No bureaucrat should have the power to make any decision on any industry in the country, if the private sector entrepreneur feels that it is profitable and it is not a criminally banned item like unspecified drugs or heroin, let the entrepreneur put his money where his mouth is. For too long, we have had some certified idiots making money for themselves out of making an art of implementing of government rules and regulations. Unless we get these corrupt, inefficient, self-serving pen-pushers out of the privatisation process, the economy of Pakistan is going to remain moribund. The greatest practical problem facing privatisation is the presence of the rule-enforcing bureaucrat, that is the essence of all our economic and political problems.
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